Removing the bottlenecks to realize energy sector potentials

Nepal can earn handsome profits selling power to India and Bangladesh

Gyanendra Lal Pradhan

For any country, food security and energy security are of very strategic importance. Any country that can manage these two factors smartly will prosper faster.
For many years, Nepal relied more on traditional energy sources. Initially, our dependency was on firewood and it gradually imported energy, primarily fossil fuel.
In the last fiscal year alone, more than Rs 320 billion was spent on fossil fuel imports. Given the volatility in the oil prices in the international market, countries like ours suffer when the fuel price increases.

When we talk about Nepal’s electricity production potential, I believe we have the capacity to produce 150,000 MW of electricity. The upgradation of the capacity of the Arun-III Hydroelectric Project from 300 MW to 900 MW has shown that the production capacity can be optimized. If we opt for the Q20 modality for the design discharge of hydropower projects, Nepal’s electricity production capacity will increase from the existing 83,000 MW to 150,000 MW.

As of now, energy generated through hydropower projects contributes only 8 percent of Nepal’s total energy needs. Can we increase the hydropower sector’s contribution to the country’s total energy needs? I believe we can. The energy produced from hydropower can be used in cooking. Currently, there are 6 million stoves in the kitchens of Nepali households, of which 3.5-4 million are gas stoves. In the previous fiscal year, the country spent Rs 61 billion to import cooking gas. If we gradually shift towards electric stoves, we can save billions of rupees going out of the country.

Sadly, the government does not seem interested in giving priority to the usage of electric stoves. So much so, that the industrial sector which cannot operate without electricity, has been forced to depend on imported energy. Of the total energy used by the industrial sector, 35 percent is imported energy.

When the power shortage was at its peak in the early 2010s, the government came up with the policy to promote domestic investment by facilitating private sector investments in the hydropower sector. It introduced a number of incentives that include a 10-year income tax exemption and mandatory lending by banks and financial institutions in the hydropower sector. And, it had a huge impact as banks’ lending to the sector increased manifold allowing the private sector to invest in hydropower projects. Currently, 3,200 MW projects are under construction.

The fact that the Nepali private sector has started generating more electricity than the state-owned Nepal Electricity Authority (NEA) is due to the investment made by independent power producers (IPPs) in the hydropower sector. What made it possible? The government’s policy created a conducive environment and instilled confidence in the private sector to invest in power projects.

Sadly, we (private investors) are a little wary of the government’s approach. On the one hand, one government agency issues a generation license, while another agency shows reluctance to sign power purchase agreements (PPAs) with IPPs.

Lately, the government has decided to open PPAs of 1,500 MW projects. But, why only for 1,500 MW?

Look at India and Bangladesh who are keen to import electricity from Nepal. India has said that it is willing to buy 5,000 MW, while Bangladesh is willing to buy 10,000 MW. Within Nepal, 10,000 MW can be consumed. When there is a market for 25,000 MW of electricity, why is NEA opening PPA for only 1,500 MW projects?

The other factor that has made IPPs wary is the recent proposal of extending the locking period for 10 years for hydropower promoters. If this proposal comes into effect, promoter shares cannot be sold for the first 10 years which will do great injustice to us (private sector investors). After 30 years, the private sector promoted hydropower projects and eventually went to the government. And, if promoters are being barred from selling their shares for 10 years, how can we expect the private sector to invest in the hydropower sector? The other thing we need to understand is that IPPs get a license for a total of 30 years. And, 10 years out of these 30 years will go towards paying off the bank interest.

The positive development that has happened in recent years is that successive governments realize the fact that foreign investment is required to harness the country’s hydropower potential. The three projects in Arun, of about 2100 MW have been given to India’s SJVN. Recently West Seti and SR-6 projects have been awarded to another Indian company NHPC Limited.

Nepal can earn handsome profits selling power to India and Bangladesh, the two power deficit countries in our region. The NEA is currently selling electricity to India at INR 9.36 per unit. This opportunity does not come again and again. The government should not fail to capitalize on this opportunity.

After highlighting these brighter pictures, I must confess there are still many hurdles that discourage the private sector. Policy reform in the energy sector is a must. Hydropower investors have the compulsion to visit around three dozen government offices in order to get approval for the hydropower project, from environmental clearance, PPA, and land acquisition before the project goes into the construction phase. Our experiences tell us it is not easy to get approval from the Forest Ministry, Home Ministry, and Land Reform Ministry. The government has to set up a one-window policy for the hydropower sector if it really wants to facilitate the investors.

Generally, it takes 7-8 years to complete the study of hydropower projects that include clearance and approval from government entities, and another four years to complete the project. This timeline, especially for government clearance, must be shortened, then only project costs can be brought down.

The Upper Tamakoshi, a project of national pride, took many years to complete. Yes, the operation of Tamakoshi alone increased the country’s GDP by 0.6 percent. But why did it cost Rs 80 billion, much more than the initial estimation? This issue should be seriously looked into so that other government-backed projects do not repeat such mistakes.

If the government should get soft loans from international financial institutions like the World Bank and give them to the domestic banks at 3-4 percent, asking them to invest in hydropower at 6 percent, then the cost of electricity production will decrease.

We must look at the cost of the projects developed by the NEA and that by the IPPs. Are there any Q40 projects developed by the NEA at around Rs 200 million per MW? If we need to lower the per MW cost, then we should be ready to allow power projects’ design in the Q20 model. This will also allow the project to generate electricity to the fullest even during the wet season. In our case, July-October is the period of higher electricity generation. The government has not fully allowed the power developers to utilize this opportunity.

The modality the government undertook in the Arun-IV Hydropower Project should be the model when it comes to attracting and facilitating foreign investment in the hydropower sector. As per the agreement, Nepal will get 21.9 percent of free energy from the 695MW project and 49 percent share ownership while SJVN gets 51 percent share.

This 49:51 model should be followed in other FDI projects in the hydropower sector. Let us allow foreign investors to take 51 percent stake, and the government takes 49 percent and a certain percent of free energy.

The Pancheshwar Multipurpose Project should be moved forward in this fiscal year. The government has recently registered a company to develop the Budhi Gandaki Hydropower Project. While the government is spending Rs 3-4 billion on this project, it is India that gets downstream benefits. The government should have told India that since the Budhi Gandaki Project is being developed, and you will get downstream benefits, give us a Line of Credit.

It’s been while the Nepali private sector has been urging the government to allow them to enter into the power trading business. While the private sector is not prepared for large-scale power trading, the state should make a policy and allow them to get into the business. If Nepali power producers are allowed to sell power to the industrial sector, we are ready to sell at Rs 4 per unit during the wet season.

The private sector should be able to bring the systems and practices of international power pools such as African Power Pool, Nord Power Pool, and Canadian Power Pool as technical and investment partners. But for that to happen, the government must issue power trade licenses to the private sector. Currently, Nepal’s total electricity generation is about 2,200 MW, of which the power consumption during the night is only 1,200 MW. The rest of the electricity is not being wasted. The delay in the construction of transmission lines is hurting us when there is demand from India and Bangladesh. Electricity cannot reach the market without transmission lines.

The transmission line projects are not financially feasible for the private sector and countries like ours cannot afford to build them by taking loans. This is where projects such as Millennium Challenge Corporation (MCC) Nepal Compact are of so much importance to us. The transmission lines planned under the Nepal Compact are so vital to the country’s power sector as it connects hub to hub.

Pradhan is Executive Chairman at Hydro Solutions Pvt. Ltd.

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